The bid by Morse to acquire local SAP consultancy Diagonal could be heading for the rocks already, with Morse’s investors reacting negatively, and rival Microgen still considering a bid.
Brentford, UK-based Morse’s share price has fallen 17% from the beginning of the week to close at 1.07 pounds per share at the end of trading on Wednesday, the lowest price for over a year. The fall will affect the value of Morse’s offer announced on Tuesday, which valued Farnham, UK-based Diagonal at 50.2m pounds, 55% of which would be paid in Morse shares.
Windsor, UK-based Microgen said it is now considering making a formal offer for Diagonal, after saying it was willing to pay between 50 pence and 55 pence per share for Diagonal on July 7, 2004. Diagonal originally snubbed Microgen’s informal offer claiming a lack of cash content to the offer. Releasing its interim financial results yesterday, Microgen said that if it does decide to make a formal offer, this could include partial cash alternatives or a mixed cash and share bid.
Spokespeople from Diagonal and Morse have brushed off Microgen’s statements as posturing, and claim Morse’s falling share price is down to short-term share movements. Microgen has also not come out of this unscathed, with its share price falling by at least 5% on Thursday.
There are valid concerns regarding a Diagonal tie-up with either Morse or Microgen. Morse and Diagonal have both struggled in recent years, the former trying to move into higher margin services and the latter being pulled down by its poorly performing secure networks division.
In its interim report for the six months to December 31, 2003, Morse’s net loss widened to 8m pounds ($14.9m) from 6.8m pounds ($12.7m) in the same period in 2002, on revenue that grew by only 1m pounds ($1.9m) to 187m pounds ($348m). Diagonal, which released its half-year report on the same day as Morse’s acquisition announcement, widened its net loss over the six months ended May 28, 2004 to 651,000 pounds ($1.2m) from 245,000 pounds ($456,000) the previous year. Revenue fell by just under 6m pounds to 24.8m pounds ($46.2m) for the period.
Microgen is slightly healthier. The company made a net profit of 841,000 pounds ($1.6m) in the six months ended June 30, 2003, up from a loss in the previous year of 1m pounds, on revenue that almost doubled 21.1m pounds ($39m) on the back of two acquisitions. Nevertheless, there is concern that Microgen, which has only just reached a similar size to Diagonal, will have trouble merging with a company of equal size.
For Diagonal investors there is a strategic decision to be made. Morse will provide Diagonal with the opportunity to cross-sell with its hardware and software clients, and enable the company to reach a larger broader audience. Microgen would enable Diagonal to retain its market positions as a pure IT services and consultancy company. Diagonal’s board backed the Morse bid, but shareholders from both companies have yet to make their deicisons.
Both Diagonal and Microgen are under pressure to scale up in a market where clients are increasingly rationalizing the number of suppliers they deal with. Consolidation is rife in this area of the IT services market and ComputerWire has tracked more than 10 SAP services-related acquisitions in the first half of 2004, almost all of which were mid-size companies. The list of purchasers include Capgemini, Cognizant, Softlab, and even SAP itself, which is in the process of acquiring all the shares of SAP SI and integrating it into its internal services division.